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Tata Chemicals: The bad effect of goodwill - Views on News from Equitymaster

Performance summary

Operating margins on a consolidated basis shrink by 5.5%, leading to a 32% drop in operating profits

Bottomline goes into the red on the back of poor operating performance and extraordinary loss to the tune of Rs 13 bn

Net profits on a standalone basis slump 49% YoY on the back of poor operating performance and lower other income

Consolidated profits for the full year goes in the negative despite a 8% growth in topline

Consolidated

Standalone

Consolidated

(Rs m)

4QFY13

4QFY14

Change

4QFY13

4QFY14

Change

FY13

FY14

Change

Net sales

33,283

36,950

11.0%

19,329

20,057

3.8%

147,110

158,954

8.1%

Expenditure

28,578

33,756

18.1%

17,508

18,384

5.0%

125,481

140,860

12.3%

Operating profit (EBDITA)

4,706

3,194

-32.1%

1,821

1,673

-8.1%

21,629

18,094

-16.3%

EBDITA margin (%)

14.1%

8.6%

9.4%

8.3%

14.7%

11.4%

Other income

1,879

615

-67.3%

1,456

801

-45.0%

4,178

1,424

-65.9%

Interest (net)

1,067

1,213

13.7%

455

536

17.8%

4,639

5,793

24.9%

Depreciation

1,191

1,141

-4.2%

429

385

-10.3%

5,339

4,712

-11.7%

Profit before tax

4,326

1,455

-66.4%

2,392

1,553

-35.1%

15,829

9,013

-43.1%

Extraordinary items

(5,146)

(13,035)

153.3%

(310)

(593)

(6,699)

(14,202)

Tax

684

249

-63.6%

484

148

3,025

2,888

-4.5%

Profit after tax/(loss)

(1,504)

(11,829)

1,598

811

-49.2%

6,105

(8,077)

-232.3%

Share of loss of associate

11

8

-28.3%

-

-

31

33

Minority Interest

366

421

15.1%

-

-

2,070

2,210

Net profit after minority interest

(1,880)

(12,257)

1,598

811

-49.2%

4,004

(10,320)

-357.7%

Net profit margin (%)

-5.6%

-33.2%

8.3%

4.0%

2.7%

-6.5%

No. of shares (m)

254.8

254.8

254.8

254.8

254.8

254.8

Diluted earnings per share (Rs)*

(40.5)

Price to earnings ratio (x)*

n.a.

(* on trailing twelve months earnings)

What has driven performance in 4QFY14?

The 10% growth in consolidated topline was a combination of 16% growth of the inorganic chemicals segment and 20% growth posted by the agri segment of the company. The fertilisers segment on the other hand, witnessed a fall of 3% YoY.

As per the company, soda ash demand continues to be robust. Markets both here and internationally are looking stable and the firm remains positive on the demand scenario going forward domestically as well as internationally.

As far as other segments are concerned, fertilisers witnessed a minor fall of 3% on a consolidated basis. As per the company this was due to the business getting affected on account of restricted capacity utilization at Babrala due to lack of clarity on policy and gas cost reimbursement on the above cut off production

Agri inputs segment put up a good show, growing by nearly 20% during the quarter on a consolidated basis. The company has made non-subsidy farm business and the consumer business as its growth platforms and this thrust will continue in the future as well

Consolidated segmental break up...

Segment

4QFY13

4QFY14

Change

FY13

FY14

Change

Inorganic Chemicals

Revenues

18,330

21,194

15.6%

74,991

81,676

8.9%

PBIT

(1,615)

(8,022)

396.7%

7,881

(212)

PBIT margin

-8.8%

-37.9%

10.5%

-0.3%

Fertilisers

Revenues

11,904

11,560

-2.9%

54,366

55,081

1.3%

PBIT

522

(873)

3,618

2,303

-36.3%

PBIT margin

4.4%

-7.6%

6.7%

4.2%

Other agri inputs

Revenues

3,012

3,604

19.7%

16,799

20,235

20.5%

PBIT

170

283

66.2%

2,002

2,491

24.4%

PBIT margin

5.7%

7.9%

11.9%

12.3%

Others

Revenues

194

499

157.2%

891

1,745

95.8%

PBIT

(130)

(364)

178.9%

(479)

(780)

62.8%

PBIT margin

-67.3%

-72.9%

-53.8%

-44.7%

Consolidated operating profits fell by 32% YoY during the quarter as barring employee costs and power and fuel expenses, all the other cost heads grew at a faster rate than the sales.

PBT of the company came in lower by 66% YoY as besides lower operating profits, interest costs and lower other income also impacted profits negatively.

At the bottomline level, profitability fell further with the company's bottomline going into the red and suffering a loss to the tune of Rs 12.3 bn. Significantly higher extraordinary losses, due mainly to one-time restructuring charge of Rs 9.2 bn, most of which attributed to goodwill, at its Kenyan operations were mainly responsible for the same.

What to expect?

At the current price of Rs 321, the stock trades at an EV/EBIT multiple of around 8.5 times its standalone FY15 expected EBIT. The expected stability of the inorganic chemicals business augurs well for the medium term outlook of the company. This, combined with the robustness of the agri business and the continued stability of the fertilisers business enables us to maintain our BUY on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 4-5% of your portfolio.

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